Why we shouldn’t buy into the bullishness in global markets
The resilience in global markets following the Brexit decision is at odds with rising political risk and slowing economic momentum
A cursory glance at the performance of global equity markets over the past three weeks suggests there is not a lot for investors to fret about these days.
The FTSE All-World Index, a leading gauge of global stock markets, currently stands just above its level on June 23, the day Britain voted to leave the European Union (EU), triggering a brief but sharp sell-off and plunging the UK and Europe into a protracted period of deep political and economic uncertainty.
On Wednesday, the US benchmark S&P 500 index hit a new record high amid better-than-expected corporate earnings.
The ‘bad news is good news’ narrative is back in vogue
Not only have investors shrugged off the potential damage and existential questions stemming from a British exit from the EU, they also appear unconcerned about last weekend’s botched military coup in Turkey - a member of NATO which has played a crucial role in both the West’s war against Isis and the EU’s efforts to stem the refugee crisis - which left nearly 300 dead and is likely to lead to an even more authoritarian government under president Recep Tayyip Erdogan.
While investors’ insouciance about Turkey is understandable given that the coup failed and could lead to a more stable, albeit repressive, political system, their apparent unconcern about the ramifications of the Brexit vote is perplexing, to say the least.
Why are markets proving so resilient in the face of a severe escalation in the risks and vulnerabilities confronting the global economy?
A new survey of market sentiment among bond and currency investors published by Bank of America Merrill Lynch (BAML) last week sheds some light on these issues.
According to the survey, the political and economic fallout from the Brexit vote is the number one concern for investors over the next 12 months, followed by the threat of a US recession and a “hard landing” for China’s economy.